Housing in past times was a entity that was perfect for wealth building. It wasn’t liquid, so you couldn’t trade it. It wasn’t something that was priced easily or often, so you weren’t feeling the price movements, therefore we hold on through troubled times. It wasn’t something that was likely to go down in value over the long term, at least keep up with inflation. But perhaps more importantly, we all were highly leveraged. We went into the investment with only 20% equity and borrowed the rest. Plus adding the dividend of providing a place to live, Jackpot! The perfect investment, or close to it.

But now, we are too leveraged, instead of building equity, we are spending equity as if it were income, and perhaps worst of all, we are trying to buy and sell as if it were a liquid market with no sales or tax consequences.

As for subsidizing housing, it’s hard to put that totally in a bad light. Adding liquidity to a market is usually thought of as a good thing and if run properly, they are simply intermediaries between the banks and the investors. In fact, a case could be made that they are very helpful and in some ways subsidizing the banks. They banks no longer hold homeowner debt, they simply pass it on to the market. They have become paper pushers making more on fees than on the carry trade. Therefore their incentive isn’t so much to make good loans, but rather to make a lot of loans. This has lead to a reduction in the credit worthiness of borrowers and the flexibility of loan terms. Those two factors, really add fuel to the low interest rate fire.

The stock market has been running up since 2003, during the housing boom. So money wasn’t leaving, it was entering the stock market. It wasn’t just low rates though. It was the exotic loans and a reduction of credit quality. They loaned money to anyone at unbelievable terms. That is what really got it going.